FDIC adopts rule for deposits in overseas U.S. bank branches

The Federal Deposit Insurance Corp. approved a rule responding to concerns that commercial depositors in overseas branches of U.S. banks could be disadvantaged in the event of a lender’s collapse.

FDIC board members meeting in Washington today voted to adopt a measure responding to U.K. regulators’ concern that U.S. banks favored domestic depositors over foreign-based account holders. The agency in February proposed that overseas branches of the U.S. companies make an FDIC-estimated $1 trillion in deposits payable in either country.

“The final rule protects the Deposit Insurance Fund while at the same time recognizing both the FDIC’s commitment to maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system,” Chairman Martin Gruenberg said in a prepared statement before today’s unanimous vote.

One of the FDIC’s chief concerns was writing a rule that walls off the insurance fund from non-U.S. deposits, so the final proposal maintained a clear barrier. The adopted version was virtually unchanged from the February proposal.

The rule is a revision of the agency’s definition of “insured deposit” to make overseas accounts of corporate customers also payable in the U.S. It puts foreign depositors who aren’t covered by FDIC insurance in line ahead of general creditors in a liquidation. About 40 percent of such deposits are in the U.K., according to the FDIC.

In a joint letter to the agency in April, officials from Bank of New York Mellon Corp., Northern Trust Corp. and State Street Corp. said that instead of forcing banks to make the deposits dually payable, the FDIC could just give the same treatment to all global deposits of a bank without extending insurance protection -- an effort they acknowledged would have required more rulemaking.

Not ‘Optimal’

“Dual payability is not an optimal way to treat custody depositors and our customers have not asked to have their deposits made dually payable,” the banks said in the letter.

Gruenberg said in February that the rule would bring U.S. banks into compliance in the U.K. without requiring the institutions to turn their branches into subsidiaries.

Restructuring foreign-branch deposit agreements and making operational changes will be “an administratively challenging and costly process,” according to the Clearing House Association LLC, a New York-based trade group that represents large U.S. banks including JPMorgan Chase & Co. and Bank of America Corp.

“Because of the negative consequences to U.S. banks that result from dually payable deposits, U.S. banks are likely to make their foreign branch deposits dually payable only when forced to do so by a foreign regulator,” the Clearing House Association said in a letter to the FDIC.